What is the RWA track that giants like Binance and Goldman Sachs are entering?

Source: veDAO Research Institute

The concept of RWA (Real World Assets) has been a hot topic in recent months, with major institutions laying out their strategies in this field, believing it is time to enter and expressing long-term optimism. For example, earlier this year, Goldman Sachs' digital asset platform officially launched and helped the European Investment Bank issue €100 million in two-year digital bonds; subsequently, engineering giant Siemens also issued €60 million in digital bonds on the blockchain for the first time; Binance released a 34-page in-depth research report on RWA in March; Citibank has been a strong advocate, stating in a report that almost anything of value can be tokenized, and the tokenization of financial and real-world assets could be the "killer application" for blockchain breakthroughs, predicting that by 2030, there will be $40 trillion to $50 trillion in tokenized digital securities.

It is evident that the RWA sector is a key narrative to focus on this year. This article will explain and analyze the relevant content of the RWA sector and highlight noteworthy ecological projects, sharing potential speculative opportunities with you.

What is RWA

RWA refers to the tokenization or NFTization of real assets, which can bring real-world assets such as real estate, bonds, and stocks onto the blockchain. Owning a token represents ownership of that item in the real world, allowing for transactions such as loans, rentals, and sales on-chain. In fact, this concept has seen successful cases of RWA in the crypto space, such as the stablecoins USDT and USDC, which are tokenized representations of the US dollar.

Impact and Advantages of RWA + DeFi

• The most core impact of RWA on DeFi is the bridging of traditional finance and crypto finance: RWA brings off-chain financial assets onto the chain, and RWA tokens can be redeemed for off-chain assets, creating a pathway between real assets and DeFi. This can enhance the externality of DeFi and improve the liquidity of various assets, ensuring the sustainability of crypto finance.

• Breaking the closed system and injecting more playability and possibilities into DeFi: Currently, DeFi is a relatively closed environment, with yields coming from endogenous systems such as transaction fees, borrowing costs, staking rewards, and inflation gains. RWA can diversify the underlying assets, allowing for any possible items from real life, thus enabling innovative play styles to emerge in crypto finance.

• Expanding DeFi yields and providing players with sustained motivation: As the yields of various DeFi protocols decrease and market uncertainty increases, DeFi investors increasingly need a diversified portfolio of real-world assets to obtain stable returns unrelated to cryptocurrencies. For example, US Treasury bonds offer a 5% yield, which is a preferred investment target for many investors after last year's bear market. Through RWA, investors can enter traditional off-chain markets, making free investment choices and obtaining diversified returns.

• The commercial value and potential of RWA tokenization in DeFi are recognized, attracting major institutions to lay out their strategies and capital. Traditional financial institutions hold a large amount of real assets, such as real estate, stocks, and bonds, but the ownership and trading of these assets typically require certification and regulation by intermediaries, which involves significant time and cost. The use of RWA can bring higher liquidity and value to enterprises by reducing the need for intermediaries, automating processes, and increasing liquidity, thereby enhancing returns and competitiveness.

RWA Project Analysis

Currently, based on the nature of the assets and the method of tokenization, RWA can be divided into stablecoins, private credit, stocks and bonds, real estate, carbon credits, metals, etc. Here are several highly promising RWA projects:

1. Centrifuge Private Credit

Centrifuge, launched in 2017, is the first project to work on RWA on MakerDAO. It is an on-chain ecosystem for structured credit, focusing on the tokenization and securitization of previously illiquid debt. It aims to help central enterprises finance with lower thresholds while allowing investors to earn income from real assets.

Centrifuge essentially simulates the process of corporate credit in traditional finance, but uses DeFi + NFT to eliminate some of the intermediaries' involvement and the cumbersome off-chain processes. The financing process on Centrifuge can be summarized as follows: borrowers package and upload their off-chain real assets, generating a legally effective NFT for collateral, and receive interest-bearing ERC20 tokens, which investors can purchase with DAI; upon maturity, the initiator redeems the financing, and investors receive returns. The fund pools generated from the interest-bearing ERC20 tokens are divided into junior and senior pools, with junior pool investors earning higher returns but facing higher risks, while senior pools offer relatively lower returns and risks.

According to data disclosed on its official website, Centrifuge has raised over $385 million, with a TVL that has doubled since last year. Its tokenized assets have been integrated into the entire DeFi ecosystem, including $220 million in risk-weighted assets on MakerDAO.

2. Ondo Finance Public Bonds

Ondo Finance is a DeFi protocol founded by former Goldman Sachs digital asset team member Nathan Allman and former Goldman Sachs technology team vice president Pinku Surana. It has currently raised $34 million in investments from well-known institutions such as Pantera Capital, Coinbase Ventures, Tiger Global, and Wintermute.

Ondo Finance is known for launching four tokenized funds through large high-liquidity ETFs managed by asset management giants like BlackRock and Pacific Investment Management Company (PIMCO): the US Money Market Fund (OMMF), US Treasury Bonds (OUSG), Short-Term Bonds (OSTB), and High-Yield Bonds (OHYG), with an average yield of around 6%. However, for compliance reasons, Ondo Finance will implement a whitelist system, requiring investors to pass KYC and AML screenings before signing subscription documents. Fund tokens can be traded using stablecoins or US dollars and used in permitted DeFi protocols, with Ondo Finance charging an annual management fee of 0.15%.

3. MakerDAO Bonds, Stablecoins

MakerDAO is an open-source decentralized autonomous organization created on the Ethereum blockchain in 2014, where holders of its MKR token can participate in project governance. Additionally, MakerDAO issues the stablecoin DAI and supports and stabilizes DAI's value through a dynamic system of collateralized debt positions and other mechanisms.

MakerDAO issued the world's first DeFi-based real asset loan, having early laid out its strategy in the RWA sector. In 2020, MakerDAO officially made RWA a strategic focus and released guidelines and plans for introducing RWA. In addition to issuing the stablecoin DAI, MakerDAO passed proposals to use RWA as collateral in the form of tokenized real estate, invoices, and receivables to expand DAI's issuance.

In 2022, MakerDAO also partnered with BlockTower Credit to launch a $220 million fund to finance real-world assets. The scale of MakerDAO's RWA business exceeds $680 million, with $500 million of RWA collateral being US Treasury bonds. Additionally, Société Générale borrowed $7 million from MakerDAO, with its position supported by AAA-rated bonds worth €40 million as OFH tokens. It is reported that about 70% of MakerDAO's revenue in December 2022 came from RWA.

MakerDAO can be considered an early entrant in the RWA space, but the concept of RWA had previously received a lukewarm response and had not made significant breakthroughs. It wasn't until 2023, when the scale of DeFi rebounded and other traditional giants entered the field, that RWA regained attention. Given its early groundwork, MakerDAO has richer experience, including previous collaborations, support for the economic value of DAI, and successful token issuance experiences, leading to widespread optimism in the market regarding MakerDAO.

4. RealT Real Estate

RealT is a company that tokenizes off-chain assets and is one of the pioneers in asset tokenization, primarily focusing on tokenizing real estate in the United States. By tokenizing real estate, RealT can address issues of liquidity and transaction costs associated with real estate assets. For example, properties that originally needed to be bought and sold as whole units can be fragmented, allowing ordinary investors to participate in investments by holding partial ownership. This enables investors who traditionally find it difficult to invest directly in US real estate to do so.

When investors purchase its token RealToken, they essentially invest in a real estate asset and receive documentation proving their ownership of that portion of the asset. Even if RealT were to shut down or disappear for some reason, RealToken would still remain valid, and the interests of RealToken holders would not be harmed. Therefore, the value and validity of RealToken itself are not affected by RealT.

Moreover, RealT will use IPFS technology to permanently store these documents proving the validity of RealToken assets. Once these documents are stored on IPFS, they will be immutable and will no longer require reliance on third-party institutions for storage. In addition to these asset-proving documents being uploaded to IPFS, data and information regarding property inspections, insurance, property taxes, and more will also be gradually uploaded to the IPFS system. This data and documentation will provide real, objective, and verifiable information about the described real estate, recording all transaction histories of the property and allowing for easy verification of authenticity.

Once the asset proofs and data are securely stored, the data regarding property prices will also be stored. RealT will introduce oracles to obtain real assessment data about real estate directly from the market without third-party institutions, aiming to reflect real estate prices as objectively and accurately as possible. This will ensure complete transparency and public access to real estate data, and the assessment of property values must also be thoroughly transparent.

Currently, the total value of global real estate is approximately $360 trillion, a massive market that makes us eagerly anticipate its activation and innovation in DeFi post-RWA.

5. Galileo Protocol Open Source Infrastructure

Galileo Protocol is a platform for the tokenization and redemption of physical assets, serving as open-source infrastructure for executing smart contracts. It allows for the creation of "pNFTs" representing physical goods, issued across multiple chains and capable of interacting with any blockchain.

Through the Galileo platform, users can diversify their crypto portfolios into physical assets, obtaining non-liquid assets. Moreover, Galileo ensures that the associated physical asset pNFTs are authentic and free from counterfeits. Since pNFTs are tokens based on the QRC20 standard, they can achieve interoperability across all major chains, providing information on the storage and provenance of these assets, thus avoiding counterfeiting and fraud.

LEOX, as the native token of Galileo, allows users to take on four different stakeholder roles: The Owner, The Buyer, The Redeemer, and The Fractional Investor.

In Galileo, if you act as a seller, you can generate an NFT to prove your ownership of the physical asset. As a buyer, you can directly purchase the physical asset you desire. After the purchase, the seller will send the NFT to the buyer, making them the new official owner of that physical asset. If you act as a fractional investor, you may only purchase a portion of the physical asset. For example, real estate, a highly valuable asset, can be fragmented, allowing multiple fractional investors to invest in that property. If you take on the role of the redeemer, you can directly redeem the asset and take possession of it.

Will RWA Flourish?

In 2023, the narrative of RWA has gained attention, and some institutions are diving into the construction of the RWA field. However, the sector is still in its early development stage and relatively small in scale; it also somewhat relies on various DeFi protocols, especially in terms of oracles, which have not been sufficiently developed. Lastly, there are compliance issues with RWA, and builders in this field are continuously battling with regulations, aiming to connect Web3 with the real world.

Currently, there is no leading project in the RWA space, but with the massive market demand and the wave of on-chain and off-chain financial connections, this field is bound to attract attention, and the timing will eventually come. We also believe that the projects mentioned in this article can stand out, driving the entire sector forward, making DeFi more vibrant and interesting, and providing investors with more investment opportunities.